UPDATE 1-Mexico vulnerable, but outlook improving -finance minister

MEXICO CITY, March 23 (Reuters) - Mexico's economy may face further volatility, but the outlook for the country is less gloomy, Finance Minister Jose Antonio Meade said on Thursday.

"We are not exempt from seeing and living a period of great volatility, but the scenarios are becoming more contained," Meade told local radio.

The Mexican peso slumped to a record low in January on concerns that U.S. President Donald Trump could rip up a free trade deal with Mexico, but it has recovered as the country's northern neighbor has taken a more conciliatory tone.

The recovery in the peso from its January low will help inflation cool back toward policymakers' 3 percent target, central bank chief Agustin Carstens said on Wednesday.

Data on Thursday showed Mexico's annual inflation rose to 5.29 percent in early March, its fastest pace in nearly eight years, and Carstens said in a radio interview on Thursday that policymakers had some room to continue raising interest rates.

The central bank raised its benchmark interest rate to a nearly eight-year high of 6.25 percent in February. Policymakers have said they do not expect a big effect on economic growth from higher rates.

However, Moody's Investors Service said in a report on Thursday that tighter borrowing costs in Mexico would weigh on the country's "lackluster" economic performance and could be a problem for companies that rely on short-term financing. (Reporting by Adriana Barrera; Editing by Lisa Von Ahn)